HSBC 2012 Annual Report Download - page 286

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Capital > RWAs / Movement in total regulatory capital in 2012
284
recalibration with more recent data observations.
Further reductions of US$7.4bn were due to positive
credit quality migration and the progression of assets
into default as a result of the challenging conditions
in the US mortgage market. As assets approach and
go into default, capital requirements are increasingly
reflected in an expected loss deduction from capital,
rather than having a direct effect on RWAs (see
‘Deductions’ within ‘Composition of regulatory
capital’ on page 286). Additionally, RBWM
continued to manage down the residual balances in
our North America retail portfolios through a
combination of run-off and write-off which resulted
in a reduction in RWAs of US$12bn. In our North
America wholesale portfolios, there was an increase
in book size with RWA growth of US$4.9bn, mainly
in our CMB and GB&M businesses. This was
partially offset by favourable movements in book
quality for those portfolios which reduced RWAs
by US$4.5bn.
Corporate and commercial lending and trade
finance activity in our CMB and GB&M businesses
were the primary drivers of the book size RWA
growth of US$9.0bn in Rest of Asia-Pacific and
Hong Kong, while the book quality was relatively
stable overall. Data enhancements in Rest of Asia-
Pacific and Hong Kong allowed us to improve the
quantification of exposure and risk metrics, and are
reflected in internal methodology and policy
updates.
In Europe, rating agency actions on ABSs held
in GB&M business were one of the main drivers for
the movement in book quality of a reduction of
US$6.6bn in RWAs. Lower grade investments are
deducted from capital rather than risk-weighted,
such that the effect is reflected in reduced RWAs
and increased capital deductions (see ‘Deductions’
within ‘Composition of regulatory capital’ on
page 286). Other drivers of the movement in book
quality included an improvement in the credit quality
of the corporate portfolio in CMB and retail
portfolios in RBWM. Reductions in the Europe IRB
book size were from lower corporate and
institutional exposures in GB&M, partly offset by
corporate exposure growth in the top CMB markets.
A change in methodology for the regulatory
treatment of European Economic Area (‘EEA’)
central bank exposures, to include them in the
standardised approach, resulted in a reduction of
US$1.2bn.
In the Middle East and Latin America, book size
and book quality levels were stable, with the main
credit risk RWA movements reflecting mergers and
acquisitions, including purchases in Oman and the
UAE and disposals in Costa Rica, Honduras and El
Salvador.
Counterparty credit risk and market risk
RWAs
(Unaudited)
Trading portfolio movements for the modelled
approaches to market risk and counterparty credit
risk (‘CCR’) RWAs are outlined in the tables below.
For the basis of preparation, see the Appendix to
Capital on page 295.
RWA movement by key driver – counterparty credit
risk – IRB only
(Unaudited)
CCR RWAs decreased by US$4.9bn during
the year, primarily due to methodology and policy
changes in GB&M. The main drivers of the change
arose through the increased application of
counterparty netting within the calculation and from
counterparty data refinement which allowed us to
apply lower potential future exposure add-on factors.
There were reductions in book size in North
America, due to a decrease in the GB&M legacy
credit portfolio and from maturing trades, and in
Latin America due to reduced repo activity with
central banks and lower exposure in respect of
derivative transactions.
RWA movement by key driver – market risk –
internal model based
(Unaudited)
US$bn
RWAs at 1 January 2012 ............................. 54.7
Foreign exchange movement and other ....... (0.4)
Movement in risk levels .............................. (7.4)
Model updates .............................................. –
Methodology and policy............................... (2.4)
Internal updates ....................................... (2.4)
External updates ...................................... –
Total RWA movement ................................. (10.2)
RWAs at 31 December 2012 ....................... 44.5
US$bn
RWAs at 1 January 2012 ............................. 50.6
Book size ...................................................... (0.8)
Book quality ................................................. 0.1
Model updates .............................................. (0.2)
Methodology and policy............................... (4.0)
Internal updates ....................................... (4.0)
External updates ...................................... –
Total RWA movement ................................. (4.9)
RWAs at 31 December 2012 ....................... 45.7